A key indicator of a well run business will often be found in the time and effort that has been spent on disaster recovery or business continuity planning (BCP). A key factor in any BCP will be the insurance that is arranged for the business. It is therefore essential that the business fully understands the insurance cover that it has in place and how this interacts with and underpins the BCP. Many good businesses with well developed BCP's can be destroyed by the failure to properly insure their operations through lack of knowledge about the finer points of their insurance cover. When insuring a business can often focus in great detail on the value of the physical buildings and contents whilst brushing over the finer points of the business interruption cover.
Business Interruption Insurance (BII) protects the income of the business in the event that an insured event occurs (e.g. fire flood etc.) which prevents or reduces the ability of the business to function. BII cover is bought as part of the insurance protection that covers the property (buildings and contents) of the business. A BII policy will pay out only if the cause of the loss is covered by the property policy. So for example a burst pipe at a restaurant that causes a flood and prevents the business from functioning would trigger a business interruption claim, whereas a new road layout that alters the flow of passing trade would not (although road works or a road closure might!).
A BII policy covers items such as loss of profits, increased cost of working, and additional expenses incurred to keep the business running. The coverage is normally subject to an over arching set limit and a predefined time scale over which the cover will operate. In order to make a claim a business will need to be able to provide proof in the form of previous trading figures of the loss of profit or additional expenses incurred.
Most BII policies are issued to cover Gross Profit. One of the common mistakes that a business can make when calculating the sum to be insured here is to consider only the net profits of the business. A BII claim under the Gross Profit heading will normally be calculated using the following formula:-
Amount of Insurance
-------------------------- X loss = Value of claim
Gross Profit
Another common problem relates to the period of time that is insured. Whilst a business may be able to rebuild or reinstate damaged property over a relatively short period of time, the time to return the business to the pre loss level of turnover or profit may be longer, This could be because orders are lost to the competition during the period that the business is inactive or because it take time to rebuild the reputation of the business. The additional loss of profits may need to be insured in addition to the gross profits depending on the policy wording.
In addition to the loss of profits heads of cover, a BII policy may need to extend to include Additional Expenses. In order for a business to continue to function during a period of interruption, it may necessarily incur additional costs, over and above what it would normally have to find, to keep the business running. This might include for example temporarily relocating employees, the cost of management overtime or the additional cost of subcontracting work that would normally be carried out in house in order to fulfil contractual obligations to clients or to retain orders.
For help and advice on commercial insurance issues contact Affinity Select Insurance Services Ltd on 01825 745 410
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